By Adewale Sanyaolu with agency reports
Minister of Power, Works and Housing, Mr. Babatunde Fashola, shocked most Nigerians last week when he said that the 11 distribution companies would need about N220 billion to provide prepaid meter to power consumers.
Regrettably, Nigerians have had to bear the brunt of the inefficiencies of the Discos by paying about N3 billion monthly in estimated billing.
More worrisome is the Discos inability to give meters to every household further compounded by liquidity challenges, and difficulties in accessing credit to purchase meters.
But, in the face of these daunting challenges, there seems to be a ray of hope for the 11 Discos if only they could muster the courage to tap into the opportunities that exist in meter financing, thereby saving them the hassles of seeking for funds to carry out metering exercise for over six million unmetered consumers.
Electricity meters are an asset class capable of attracting long-term financing and new investments in the power sector. Meters have the unique asset features that are ideal for attracting long-term financing with long useful asset life ranging between 8–20 years of exclusive usage.
What is now required is how to unlock the huge investment opportunities in metering, through the creation of a meter asset class, which would allow for the development of financial instruments such as leasing and/or securitisation (ABS) products, to fund the rollout of electricity meters in a sustainable, long term and profitable manner.
Meter services in the Nigerian power sector
Meter services are an important aspect of a utility’s business anywhere in the world. Meter services broadly encompass metering technology and infrastructure, meter finance, meter installation, meter reading, meter testing, meter maintenance, and other ancillary meter services necessary for it to remain on the wall and functional. In some advanced jurisdictions, meter services is an industry on its own, disaggregated from the electricity distribution business, as a separate, competitive but regulated component of the power sector value chain, with licensed meter service providers. In these jurisdictions, Meter Service Providers (MSP) are responsible for all aspects of metering, including financing and providing electricity customers with meters.
A new business model for financing meters
We propose the MSP model as a new business model for the Nigerian metering industry will address the metering gap and create a competitive metering market.
Under MSP business model, a specialist meter services provider (MSP) will enter into a meter services agreement (or similar agreements) with Discos to finance the procurement of electricity meters (inclusive of the associated communication and vending infrastructure) and also their installation and management. The meters are fully owned and managed by the MSP on behalf of the Discos. For providing the meters and the associated meter services, the MSP is entitled to a fee calculated as a proportion of revenues accruing from each meter financed.
The MSP business model is not a new model per se. MSPs operate in the UK, Australia, the USA and other advanced electricity markets. In the UK, the meter services business is highly competitive and attracts significant investments yearly. The UK is presently rolling out 53 million smart meters using the MSP model, to replace existing traditional meters by 2020. The meter assets are financed and will be owned by these meter services companies who are investing billions of pounds to finance, install and manage the meters.
The introduction of regulated, specialist MSPs into the Nigerian power sector, will unlock the opportunities in metering services and introduce competition that would foster innovation, improved customer service and attract private capital into the power sector.
Who pay for meters?
The Meter Services Provider finances and also owns the meter assets. The MSP is able to raise debt and equity financing to finance the procurement of the meters on the back of its meter assets and meter revenues. For instance, the MSP can easily raise long-term bonds or commercial loans to finance the meter assets, using the same meter assets and potential revenues from the meter assets, as the underlying security. Meter financing is particular attractive and well suited to pension funds and other long term debt/equity investors as it provides stable, reliable and long term revenue streams from the underlying meter assets, if properly structured.
Cost reflective tariffs for meter services
Cost reflective electricity tariffs are also important in the MSP model. However, the challenge with today’s retail electricity tariffs is that it lumps all the various costs (generation, transmission and distribution costs) into a single kWh tariff. For the MSP model, retail electricity tariffs could be disaggregated into energy consumption (kWh) tariffs, and a meter services fee for the recovery of meter services cost. Isolating meter services fee as a line item in customer billing works also in favor of the MSPs and their financiers (debt and equity) who would have a clear line of sight to their revenues, which they would earn by providing the meter services.
Investment case for a competitive meter services industry
The pent-up demand for meters in the Nigeria electricity market is at least $800 million, with almost 50 percent of over 7.4 million customers in the Discos currently either unmetered, or with faulty or degraded meters. In addition, there are significant upsides for Investors to finance and manage meters, considering that almost 80 percent or 23million households are yet to be registered for electricity supply in Nigeria (many of them currently stealing electricity). Based on our projection, the meter services industry could be a $3 billion business by 2024.
Attractive financing structure to cash strapped Discos
Meter financing provides attractive off-balance sheet financial solutions to Discos, allowing them to receive massive investment into a very critical aspect of their businesses without significant initial/upfront capital outlay, or stretching an already tight balance sheet over-leveraged as a result of significant market debts.
The huge meter deficit, if plugged can generate significant strong cash flows for the Investor and the Disco as well. By deploying and managing millions of electricity meters, Investors in meter services can expect to generate significant monthly cash flows with very high EBITDA margins. Besides improving customer relations, Discos would generate more revenues, and potentially improve their capacity meet their payment obligations to both NBET and the Market Operator.
Employment creation
A competitive and deregulated meter services industry will create employment in the thousands. We estimate the proposed metering solutions will lead to the direct creation of more than 10,000 new jobs in meter installation alone.